June 14, 2012
CBO Chief Says Sequester Impact Will Hit Agencies Early (CQ)
Romney Doubles Down on Economic Message (Washington Post)
Weak Retail Sales Trigger Downgrades to GDP Forecasts (Real Time Economics)
Nominal GDP Targeting Could Take the Place of Inflation Targeting (Jeff Frankel’s Blog)
Editorials & Opinions
Whose Fault is Today’s Economy (Edward Lazear in Wall Street Journal)
To Save Money Market Mutual Funds, Scrap Them (Bhide and Papagianis and in Bloomberg)
Easing By the Fed Seems Likely, But What Form Will It Take? (Economist’s View)
e21 Reaction & Commentary
e21 Commentary: Does the Government Really Need More Help Than the Private Sector? (Charles Blahous)
Much has already been said and written about President Obama’s statements of last Friday that, “The private sector is doing fine. Where we're seeing weaknesses in our economy have to do with state and local government.” I am disinclined to critique the President’s choice of words, which are routinely scrutinized to a degree that very few of us could withstand. I am nevertheless reminded of Michael Kinsley’s definition of a gaffe as being when a politician accidentally tells the truth – or, in this instance, what he believes to be true. President Obama’s comment did not come out of thin air. For several months many policy advocates have argued that government cutbacks are hampering economic recovery and that the federal government should provide more aid to States and localities. The President’s statement signals that he has internalized this view. This policy view is important – more important than an inartful choice of words – because it pertains to a fundamental disagreement about the appropriate roles of the private and public sectors in our economy.
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Congressional Budget Office Director Douglas W. Elmendorf said Wednesday that federal agencies will start feeling the impact of looming automatic spending cuts this fall, before the required reductions actually go into effect, as departments start to roll out their fiscal 2013 spending plans. But Elmendorf said the details of the across-the-board cuts under the sequester are less important than the uncertainty over whether the reductions will occur. House and Senate Republicans have pressed the Office of Management and Budget to provide details of how the $109 billion in automatic cuts would affect agencies. Several GOP senators have introduced legislation that would require a report from the administration on the plans for the sequester.
The spring slowdown in the economy has further exposed President Obama’s greatest political vulnerability going into his reelection campaign and forced him into a more urgent and aggressive debate with Mitt Romney on the central issue of the presidential election. On Wednesday, Romney pounced. In a speech before business leaders, he not only blamed Obama for not turning around the economy but also indicted the central philosophy underlying the president’s efforts. Obama is expected to return fire on Thursday in what the White House is calling a major speech that will characterize Romney’s economic philosophy as a return to the flawed policies of the George W. Bush years. The intense exchange represents more than just campaign rhetoric; it lays out in stark terms the divergent approaches the two men propose to take toward mending the economy.
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May’s retail sales report showed that American consumers pulled back for the second straight month. The figures are the latest sign that the recovery remains tepid, and many economists reacted by trimming their second-quarter growth forecasts. J.P. Morgan Chase now expects U.S. gross domestic product to grow at a 2.0% annual growth rate, down from its previous 2.5% projection. The bank made small downward revisions to government spending, residential investment and foreign trade estimates but the retail sales report was the biggest cause for the revision. “The fairly pathetic pace of first-half growth reinforces the case for the Fed to take action at next week’s meeting–we continue to anticipate an extension of Operation Twist and a pushing back of guidance on the path of the fed funds rate.”
In my preceding blogpost, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT), much as the currency crises of the 1990s dramatized the vulnerability of exchange rate targeting and the velocity shocks of the 1980s killed money supply targeting. But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations? The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting. It has gained popularity rather suddenly, over the last year. Fans of nominal GDP targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand, which is really all that can be asked of monetary policy. An adverse supply shock is automatically divided between inflation and real GDP, equally, which is pretty much what a central bank with discretion would do anyway. In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target). But why has it suddenly gained popularity at this point in history, after two decades of living in obscurity?
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Editorials & Opinions
There can be no dispute that the economy was in recession in January 2009. That recession had started a little over a year before, according to the National Bureau of Economic Research, and it was long and deep. Whereas the average postwar recession lasted 11 months, the 2007-09 recession lasted 18. But all recessions end, and the 2007-09 one ended in June 2009. What we are experiencing today is a new wave of slowdowns, not a continuation of past problems. A recession begins when the economy peaks and begins to turn down. A recovery begins when the economy reaches a trough and begins to turn up. Our economy is in recovery not because it is doing well—it clearly is not—but because it hit bottom and started moving in a positive direction.
Long-overdue rules to prevent a repeat of the 2008 run on money-market mutual funds may not be passed this year, thanks to a provision just inserted in a funding bill before Congress by Representative Jo Ann Emerson, Republican of Missouri. This is unfortunate but unsurprising. Because real reforms jeopardize the very existence of money-market funds, opposition from the industry has been fierce. There is a way out, however: Pairing such reforms with a creative alternative to the current model could make the demise of money funds palatable even to their sponsors. We propose extending a government program called TreasuryDirect, which allows investors to buy Treasury securities directly from the government in accounts held with the Treasury Department. Banks and brokerages should embed a more user-friendly version of TreasuryDirect in their accounts - - call it a (new) U.S. Money Fund.
Many policymakers at the Fed would like to provide more help for the economy, but fear of inflation among other members of the monetary policy committee -- enough to matter -- makes it unlikely that the Fed will expand the size of its balance sheet (as another round of QE would do). The way around this is to enact or suggest policies such as "forward guidance," "Operation Twist," and "sterilization" that attempt to ease policy without changing the size of the balance sheet. Forward guidance, for example, tries to adjust inflationary expectations -- there is an implicit promise of future action to maintain low rates, but it does not require any action when it is announced (and Fed members are denying it was an explicit promise in any case), while Operation twist and sterilization both exchange short-term for long-term assets (sell short-term, purchase long-term) in an attempt to force long-term interest rates even lower than they already are (and hopefully stimulate investment and the consumption of durables).
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